An Owner’s Refusal to Issue Payment Might Amount to a Violation of the Unfair Trade Practices Act — But That’s Not Usually the Case

Litigation arising out of construction contract disputes obviously will include claims for breach of contract, but also tend to include claims that are based upon alleged violations of the Connecticut Unfair Trade Practices Act (CUTPA). Because there must be a good faith basis for any alleged claim, a set of facts should exist that reasonably supports any such allegations. However, given the requirements of a CUTPA claim and the frequency with such claims are alleged, a cynical person might suspect that CUTPA claims are often asserted merely as a way to circumvent the “American Rule,” which requires each party to be responsible for its own attorneys’ fees and costs.

The cost of litigation can make pursuing certain claims cost prohibitive. However, a plaintiff that prevails in a CUTPA claim may be awarded punitive damages and/or its reasonable attorneys’ fees and costs. Conn. Gen. Stat. § 42-110g. In addition, the mere threat of this additional liability may intimidate an opposing party into entering a settlement that it would not otherwise consider. Thus, alleging a violation of CUTPA may give a plaintiff a strategic advantage in litigation but such a claim is not likely to succeed in most situations.

Generally speaking, a typical construction contract dispute is not going to result in a violation of CUTPA. “A simple breach of contract does not offend traditional notions of fairness and, standing alone, does not offend public policy so as to invoke CUTPA.” Santa Buckley Energy LTD v. Tiscia Corp., 2016 Conn. Super. LEXIS 1089, *9 (Conn. Super. Ct. May 16, 2016). “Moreover, a simple contract breach is not sufficient to establish a violation of CUTPA, where a count simply incorporates the reference to the breach of contract claim and does not set forth how or in what respect the defendant’s activities are either immoral, unethical, unscrupulous, or offensive to public policy.” Alliance Food Mgmt. Corp. v. Gems Sensors, Inc., 2007 Conn. Super. LEXIS 1386, *7, (Conn. Super. Ct. June 12, 2007). However, if there are “aggravating factors,” “the same facts that establish a breach of contract claim may be sufficient to establish a CUTPA violation.” Santa Buckley Energy LTD, 2016 Conn. Super. LEXIS 1089, *9. “Connecticut case law demonstrates that the aggravating factors present must involve bad faith conduct or violation of some concept of fairness in order to sufficiently plead a CUTPA claim by way of breach of contract.” Id. at *10.

What is meant by “some concept of fairness” is not defined in the caselaw but “bad faith” is. “Bad faith in general implies both ‘actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive.’ Black’s Law Dictionary (5th Ed. 1979). Bad faith means more than mere negligence; it involves a dishonest purpose.” Habetz v. Condon, 224 Conn. 231, 237 (Conn. 1992). In addition, “[t]he standard of proof applicable to claims of bad faith is clear and convincing evidence, which is a tougher burden for a plaintiff to meet than the preponderance of the evidence standard that typically applies to civil litigation.” M.J. Daly & Sons, Inc. v. City of W. Haven, 66 Conn. App. 41, 53, (Conn. App. Ct. 2001). Because the rules of statutory construction require items listed to be of the same nature, a court would likely require the same heightened burden when determining “some concept of fairness.” Therefore, to turn a breach of contract claim into a violation of CUTPA, a plaintiff would have a substantial amount of evidence that the opposing party was acting without any good faith basis.

In construction contract disputes, both sides often have some merit to their positions. There are many issues over which people of good conscience can disagree.

In light of the foregoing, an owner should be able to withhold payment for almost any reason it honestly believes is true without potentially being found to have committed a violation of CUTPA. The question then becomes would that change if the owner refused payment after the architect and/or owner’s representative has certified an application for payment.

In most construction contracts, the architect reviews the contractor’s application for payment and, if the architect finds that the payment application accurately reflects the amount due for work performed in accordance with the Contract Documents, then the architect certifies to the owner that the contractor is due the requested payment. The question then is whether the architect’s certification renders the owner powerless to withhold payment without being subject to an unfair trade practices claim. The answer, of course, depends upon the language of the subject agreement between owner and contractor.

Most construction contracts allow an owner to withhold payment from a contractor for a number of reasons. Conversely, many construction contracts make the architect either the initial decision maker or even the arbiter of disputes arising out of any interpretation of the Contract Documents. Thus, an architect’s certification of a contractor’s payment application may create problems for an owner.

It would not be unreasonable to hold an owner to a decision reached by its architect, but that should not always be the result. In litigation, in most situations, an owner would need the testimony of an expert witness to establish that the contractor’s work was deficient. However, one exception to that rule is that an expert witness is not necessary to establish claims where the breach would be obvious to a layman. Thus, it may be possible to argue that, when a contractor’s failure to perform the work in accordance with the Contract Documents is obvious, an owner may ignore an architect’s certification of a payment application. After all, if the work has just begun and the architect is certifying an application for payment that requests payment for 100% of the contract amount, it certainly would be reasonable for the owner to refuse to issue such a payment without being found to have violated CUTPA.

For an owner’s refusal to issue a contractor’s payment to be considered a violation of CUTPA, the level of egregious conduct would have to rise to a level that is not typically seen. Thus, those considering making such claims should also consider that asserting such claims without a good faith basis may give rise to claims against them sounding in vexatious litigation and/or abuse of process.

If you are an owner or a contractor that is trying to navigate these treacherous waters of potentially costly CUTPA claims, please give me a call at (860) 760-3317.